Finance - Exam 1

Which of the following is NOT a main area of finance as taught in universities?

Accounting

Thinking about the financial markets, which of the following statements is CORRECT?

Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks.

Double taxation is a major drawback to which form of business organization?

C corporations

Many believe that insufficient supervision of the financial sector was partly responsible for the recent financial crisis. Consequently, Congress passed the ___ Act.

Dodd-Frank

Which of the following statements about stock market returns is CORRECT?

Even when the market is down for the year, some companies do well

ToF: The acronym IPO stands for "independent public offering."

False (initial public offering)

Which of the following statements is true?

Finance developed from economics and accounting

Large conglomerates that combine many different financial institutions with a single corporation are known as ___.

Financial services corporations

Which of the following is NOT a part of effective corporate governance?

Focus on short-run profits that add up in the long run

Which of the following types of funds is largely unregulated?

Hedge funds

Which of the following statements about hedge funds is CORRECT?

Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only the wealthiest investors invest in hedge funds, and they understand the risks.

The purpose of a ____ operation is to reduce risk.

Hedging

Which of the following statements about IPOs is NOT correct?

IPOs can be oversubscribed, which means that more shares are issued to satisfy demand.

______ funds are designed to simply replicate the performance of a specific basket of stocks like the S&P 500.

Indexed

Organizations that underwrite and distribute new investment securities and help businesses obtain financing are known as _______.

Investment banks

Which of the following statements is CORRECT for private equity companies?

Money used to buy target companies is often borrowed.

Which of the following is NOT a type of stock market transaction?

Outstanding shares of closely held companies that are held by investors

The New York Stock Exchange is a _______ exchange.

Physical location

Which of the following statements about managers' compensation is true?

Rewarding managers for stock performance over the long run gives them an incentive to keep the stock price high over time.

Why might stockholders prefer riskier projects than bondholders?

Stockholders do better when the company does better because the stock price is higher.

Which stock market index is generally regarded as an economic indicator of the high-tech industry?

The NASDAQ Composite Index

Which of the following statements about financial markets is CORRECT?

The New York Stock Exchange is an auction market, and it has a physical location.

Which of the following statements about the NASDAQ and NYSE is NOT correct?

The market capitalization of NASDAQ-traded stocks is higher than NYSE-traded stocks.

Which of the following statements about dealer markets is NOT correct?

There are more dealers than agents in dealer markets.

Kayla is concerned that her division manager may be pushing the development of a new product by ordering her to omit recent negative test results from internal reports. Kayla should

There is no clear answer but staying quiet may be the worst choice.

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. One example is a commercial bank, which takes in demand deposits and then uses that money to make long-term mortgage loans.

True

A stock is considered to be closely held if the corporation's shares are owned by a few individuals who are associated with the firm's management

True

Which of the following statements does NOT support the efficient markets hypothesis (EMH)?

Warren Buffet and other analysts seem to consistently outperform the market over long periods.

Jessica invests money with a friend who is purchasing a small food truck, in return for a share of the business. What type of transaction is this?

a direct transfer of capital

A limited liability company (LLC) is

a hybrid between a partnership and a corporation

Joshua recently purchased 100 shares of an innovative technology company that is going public. What type of transaction is this?

a primary market transaction

Finance does NOT affect decisions in which of the following areas?

a. Marketing b. Human Resources c. Accounting d. Management e. None of these answers is correct.

If the CEO is accused of questionable behavior, the Board of Directors should

a. investigate the situation. b. take proactive steps to ensure the situation is dealt with. c. ensure that the company's reputation is not damaged. d. avoid damage to the company's culture and long-term performance. e. All of these answer choices are correct

B corporations

a. still focus on making a profit. b. are committed to putting other stakeholders on an equal footing with shareholders. c. undergo an annual audit to review practices regarding social responsibility, corporate governance, and transparency. d. are a fairly small but rapidly growing number of companies. e. All of these answer choices are correct.

The idea that perhaps investors and managers behave differently in down markets than they do in up markets is a part of

behavioral finance theory

Effective communication with stockholders by managers

causes the stock price to remain close to the intrinsic value over time.

If the stock market is_______, it's a waste of time for most people to seek bargains by analyzing published data on stocks. Stock prices will already reflect all publicly available information and these stocks will be fairly priced.

efficient

The ______ hypothesis remains one of the cornerstones of modern finance theory.

efficient markets

Finance is important to individuals because

employees decide how individual retirement funds are invested and how much risk they are willing to assume.

To maximize shareholder wealth, decisions are evaluated

in terms of financial consequences and how they affect society at large

Investors and managers behave differently in down markets than they do in up markets and individuals tend to _____ their true abilities (under/overestimate).

overestimate

A bank loan is an example of a

private market transaction

Markets in which assets are bought or sold for delivery within a few days are known as

spot markets

Stocks are overvalued when

the actual stock price exceeds the intrinsic value of the stock.

Bondholders may demand a higher rate of return when

they believe that a company will pursue risky projects.